A Lesson Learned With IPOs: Be Careful

Don't get caught up in the market frenzy too quickly

This month, investors were taught a sharp lesson about initial public offerings.

While IPOs are a good thing for the market, they’re not always a good thing for investors. Often these offerings are met with insider selling that makes owning the stock dangerous for individual investors. So generally, I recommend staying on the sidelines when an initial offering rolls into town, no matter how hot the stock is.

This is especially true with the Facebook (NASDAQ:FB) IPO. The eight-year-old social-networking site produced the worst five-day return among the largest U.S. deals of the past decade. And its turbulent IPO is also attracting attention from the Senate Banking Committee and the House Financial Services Committee, as well as the Securities and Exchange Commission. Not exactly a confidence boost for shareholders.

I’m glad that most of you said you had no plans to buy into the IPO. Nearly 70% of you said that you weren’t planning on touching FB stock when I ran my recent Facebook poll, and I hope that I was able to discourage a few more of you from experiencing the post-IPO pain with my blog posts advising you to sit this one out.

Keep in mind that even as tech IPOs came back to life last year with hot offerings like online coupon site Groupon (NASDAQ:GRPN), professional social network LinkedIn (NYSE:LNKD), Internet radio company Pandora (NYSE:P), Chinese social network RenRen (NYSE:RENN) and social game developer Zynga (NASDAQ:ZYNG), investors have increasingly scrutinized the details of these filings, and performance has been volatile.

From their first day of trading, Groupon is down nearly 60%, Pandora is down 40%, RenRen is down a whopping 70%, Zynga is down almost 40% and LinkedIn — the sole positive — is only up about 6%.

In fact, I just made LinkedIn my Stock of the Day on Facebook now that the company has had four quarters of earnings announcements under its belt and more stable buying pressure. LNKD was added to my Portfolio Grader database shortly after its most recent earnings announcement a few weeks ago, and it has held constant at a B-rating.

The takeaway here is that while IPOs are great for drumming up investor interest, there is plenty of risk to go around. As for me, I like to stick to companies that have proved their mettle by posting stunning earnings announcements, so I don’t get caught up in the frenzy.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.